While other airlines are reducing their exposure to large widebody freighters, AirBridgeCargo recently confirmed an order for 20 B747–8Fs. So, what does ABC know that others don’t? Will Waters asks SVP for marketing and sales, Robert van de Weg
The combination of relatively stagnant general air cargo demand and the continuing expansion of cargo-friendly passenger aircraft capacity in recent years have led to overcapacity in many lanes that has driven down air freight prices and made dedicated freighters difficult to operate viably. This has led many established combination carriers to eliminate or reduce the size of their large widebody freighter fleets, sometimes partially replacing them with capacity partnerships with other freighter-operating airlines. Meanwhile, there have also been some recent increases in the use of regional feeder freighters by airline groups including IAG Cargo and Air Canada Cargo, often in partnership with integrator fleet operators – whose expansion has been revived by e-retail demand.
Reflecting some of these trends, freighter operator and leasing giant Atlas Air has this year begun emphasising the potential for the growth of its business in the future from medium widebody aircraft such as the Boeing 767 freighter rather than from its previous mainstay, the B747F. That new emphasis is linked strongly to the prolific growth in global e-commerce volumes, as illustrated by Atlas Air’s high-profile long-term capacity partnership with e-retail giant Amazon.
But in spite of these apparent trends, the Volga-Dnepr Group recently confirmed an order for 20 B747–8 freighters, principally for its AirBridgeCargo Airlines (ABC) subsidiary, almost single-handedly propping up Boeing’s 747–8F order book. The aircraft will be acquired through a mix of direct purchases and leasing over the next six years, although the first three have already been delivered – two to ABC and one to Volga’s fledgling UK-registered business, CargoLogicAir.
So, what is it that causes Volga and ABC to remain so confident in expanding when others are in retreat? Of course, to some extent these are replacement aircraft, and ABC last year indicated it intended to ensure all the 747s in its fleet are –8 freighters by 2025. It currently operates 15 Boeing 747s, including seven Boeing 747–400Fs and eight Boeing 747-8F freighters.
Robert van de Weg, ABC’s senior VP for marketing and sales, comments: “It will be partially replacements, but the degree is something that we will be working through over the next few years – and that will depend also on how the market develops. It is not something that is set in stone yet.
“But we are confident that the market will have a future, and not a bad one. We have had a couple of mediocre years, and we believe that demand will never again be what it was in the past, where we saw growth of 6-10% annually. But there will be growth.”
However, it is also about what happens on the supply side, he says, because air freight is a very simple supply-and-demand business. “A lot of the planes that are currently in service were delivered in the second half of the 1990s and the early 2000s, and there are a lot of converted freighters and MD–11s,” he notes. “Over the next five to 10 years, older long-haul freighters will start to disappear.
“So, we are confident about the demand side going forward; not a lot of new investments have been announced in the last five years. Therefore it is both.”
ABC has continued to expand strongly throughout much of its 11 years in business, with its consistent double-digit growth over the last several years continuing into 2016. Indeed, tonnes carried by the airline in the first half of this year were up by around 30%, with the carrier heading towards annual throughput of around 600,000 tonnes in 2016.
Much of this is obviously to do with the carrier’s increased capacity, but with demand relatively stagnant overall currently, it is clearly expanding its market share. So, who is it principally taking this business from?
Van de Weg responds: “There is no simple answer, but most of all we are working hard to be really focused on our customers, spend time with them and be customer driven, and I think that is paying off. Some of the European carriers, for example Air France KLM, and some of the Asian players such as Singapore and Thai, have negative growth in their capacity, and so I think some comes from there.”
One key element in winning new business is the ability to identify opportunities and respond relatively quickly to them, he says.
“If the market is on average stagnant, there will still be some markets that are doing quite well, and some not so well,” he says. “Average figures are typically used by those that sit far from the business, but we are in the business and there are opportunities. That means we increase the capacity in markets where demand is there. So, for example, where we recently grew our capacity into Singapore, that was customer driven, and Cambodia, and Los Angeles.
“That is the key thing, because there are always opportunities. Of course, we can’t escape the fact that the average market is not great, but there are opportunities and we go for them. The key thing is to listen to customers, analyse options economically, and, if positive, act quickly.”
Another factor has been ABC’s development of certain specific service solutions – for example, its charter business and solutions for the pharma market. “We have more than doubled our charter business with the 747 over the last two years, and in the off-sized cargo market we are now becoming a specialist with the 747, whereas in the past we were specialists in that market in the [Antonov] 124. Therefore, we are also building our products with charters, off size, and pharmaceuticals.”
And a progressive improvement in ABC’s quality levels, especially over the last three or four years, has also helped. Having joined Cargo 2000 as an associate member in 2007, in September 2015 AirBridgeCargo moved from ‘Test’ to ‘Implementation’ status for Cargo iQ reporting, and according to the independent Cargo iQ report last year, ABC was among the top 5 industry leaders for this quality indicator, an achievement that has already earned the airline positive feedback from its customers, the carrier says.
Price versus quality
Although air cargo business may often be won on price, that can sometimes be over-emphasised, Van de Weg believes. “The price has to be competitive, for sure, but our growth has most of all to do with the confidence of the customer in us,” he notes. “If a customer believes that we are a growing force and we have momentum, we grow with that customer. What’s also important apart from price is that people can see that our quality has improved considerably. In Cargo IQ statistics, we are really right there in the top three of providers in terms of quality.”
Business cannot be as simple as putting unbeatable prices in the market – which is also unsustainable, Van de Weg says. Instead it’s about carriers being good at what they do and working closely with customers to give them what they need. “Plus, we also have to have payback for those freighters. So, we are not a carrier that can afford pricing based on contribution margin only, because freighters are expensive vehicles,” he says.
Overall, Van de Weg is pleased with the progress being made at AirBridgeCargo. “But that doesn’t mean we can just now sit back and relax; there is still a lot to be done,” he notes. “For example, our network is still not developed enough – we are still too reliant on East-West trade – and product development also has to be expanded. But we are on the right track.”
One important element now is customers knowing the carrier is going to be around, when a lot of its competitors are reducing, eliminating, or reassessing or their main deck capacity.
“That is part of it,” he says. “I think people realise that we are serious about this business, that we are investing in it. The market can see can see we are investing in new planes and in people, and in processes, and in products. You can talk about this, but it is all about real actions. Momentum is hard to define, but the market sees that we are serious and that we are developing, and that we can prove it, and so this gives us that momentum right now.”
Van de Weg says ABC has no particular advantage or disadvantage overall in terms of its cost base compared with other operators of main deck capacity, but adds: “You have to look situation by situation. For example, compared with the European carriers, we have an advantage in that we rely less on trucking. We are a point-to-point carrier from Asia to Europe connecting in Moscow; we don’t have a lot of trucking – we go direct to Amsterdam, Frankfurt, to Milan, said Paris, you name it. So this gives an advantage compared with certain European carriers.” Compared with Asian carriers, he says it depends which one. But in general, he says ABC has a good service to both Europe and the US, and of course to Russia.
“You cannot make the comparisons in general; you have to be specific. But apparently, we have sufficient advantages that allow us to now have this momentum in the market,” he says. “Clearly, value for money is of importance, and we really try to optimise that – we want to have a fair price. But people have to recognise the value that we bring: consistency; on-time performance; and that we are a carrier to reckon with in the future. People want to be with us as they can see that we are a developing carrier.
“And I think all these things come together. It is not one thing, it is a whole mixture of things that makes one airline successful or not. If it was just price, that is not a long-term business model, of course. It is a whole mix of the value proposition.”
But with air freight rates at their current level this year, is it possible for any widebody freighter operators to be profitable? Without commenting on AirBridge’s results specifically, Van de Weg believes that it is possible, if you look in terms of the full year. “Of course, so far this year, we can say that it has been a hard year, but the year isn’t over yet. Let’s see what the balance is at the end of the year,” he says.
“Plus, if you buy an aeroplane, you buy it for 20 years, and so you have to have a view on the market to come. It’s quite a complicated assessment; it is really about having a view about how demand and supply is going to evolve over the next 10 to 15 years, although we all have to make sure that we survive in the meantime. But we are confident that we will make that.”
While some argue that air cargo growth in the coming years may be driven to a significant extent by e-commerce and e-retail expansion, favouring aircraft such as the B767 freighter as opposed to the B747 freighter, Van de Weg believes air freight can benefit more widely from this.
“Clearly, the Amazon business is a big step. They are such a huge party now in the US domestic market that apparently it pays off for them to take care of their own demands,” he notes. But he says even for that national or regional distribution network operated by Amazon in North America, the freight is typically still produced far away, benefiting long-haul airlines.
“If you look at the industry and freight forwarders, the model is shifting,” Van de Weg adds. “The traditional model was that somebody producing in Asia would ship to distribution centres in Europe or the US by air or by sea, and then distribute from there by air or by truck or by rail. This model is still there, but e-commerce bypasses this and allows for direct piece-by-piece triggering of shipments, and cargo coming then directly from the production area to the consignee.”
He continues: “But it still has to be carried, and if the urge is there for speed, it still has to be carried long haul [by air]. So I think e-commerce is also a good trend for long-haul operators; it will start to trigger additional growth because it makes it easier for the consumer to order and to purchase, and this should make the total pie bigger also for the long-haul operators.”
Customer base shifting
However, these trends may cause air cargo carriers’ customer base to change somewhat, he adds. “The forwarders will continue to be important, but some of these larger e-commerce players may become larger customers for airlines like us,” he says. “We are confident that the cost base of an operator like AirBridgeCargo is hard to beat; we are efficient; we have good performance; plus we are able to deliver special processes and procedures at origin and destination airports, to be competitive for this segment. So, we see this positively.”
He acknowledges that players like Amazon could also get into operating long haul cargo aircraft. “But let’s see,” he says. “We believe that we have the best proposition in terms of value. Over the years, we know what it takes to survive, to minimise cost and still deliver a good service, and we think what we are offering is unbeatable; it is very efficient, and we have the scale. So we believe that we are natural partners with the large e-commerce providers to work together.”
Some conversations will take place between airlines and the e-commerce players directly, while others will be done indirectly through freight forwarders.
“Some of the freight forwarders are very active to attract some of these e-commerce companies as their customers, but there are also e-commerce customers and postal authorities that approach us directly. So we see both patterns,” says Van de Weg. “Some forwarders recognise the opportunity, but for some [e-commerce players], maybe the larger ones, there will be a direct relationship with the airline like ourselves.”
This is happening already to some extent and is something that has been developing during the last 18 months to 2 years. “It is still below 2% of our business, but of course it has the potential to grow much bigger in the years to come,” he notes.
Whether there is any resistance from forwarders to that kind of relationship, or whether they recognise it is inevitable that if this is what the customer wants, this is what airlines need to provide, depends. “You would have to ask the forwarder how he sees this,” Van de Weg says. “We are a forwarder’s airline, and we have preferred customers, but if it is the policy of some of the large e-commerce customers to deal direct with the airlines, we cannot ignore that.”
Although it is currently mainly just the big e-retail players that are working directly with airlines, this may change. “We will have to see how this pans out,” says Van de Weg. “Typically, the forwarder is good at supplying logistics services but differentiation in last-mile delivery is obviously a challenge for them. But it is too soon to conclude how this is all going to work out. It could be that the forwarders in the end will be a strong service provider to certain actors in the e-commerce segment, and others like Amazon may purchase directly, There are so many other players that may not have the economies of scale to do everything themselves. I still believe that forwarders could play a significant part in this business as long as they add value. The traditional forwarder business model is, however, definitely challenged by the e-commerce trend.”
In terms of a wider general market outlook, Van de Weg believes things will continue to be challenging for some time.
“I think we still have a couple of hard years ahead until supply and demand recalibrates,” he notes. “We are still in the transition stage, the shakeout stage, which makes it very hard. So my prediction is a couple of rough years ahead with ups and downs; there may well be some good periods, but overall I think it will be tough.”
He continues: “My prediction is that for the freighter operators that can survive until 2020, the future may look better. This is not wishful thinking, but is based on the fact that not many investments have been made in freighters in the last five years, mainly because the market was so poor. So, overcapacity, simply by the laws of nature, will go away partly, as the planes get older and become less economical to operate.
“So, for those that can make it, I think it could be a better future ahead – bearing in mind all kinds of other circumstances that could appear in the meantime. My feeling is that it will be tough, it will be brutal, but once you’re in it, you have to make the most of it, and try to be better than the competition, and at AirBridgeCargo that is what we try to do.”
This challenge of predicting the future seems ever more difficult, particularly in terms of the international geopolitical environment. “That goes for any business,” Van de Weg adds. “But I’m not pessimistic. We know what it means to deal with turbulence, and so we have to get on with it and aim be better than the others, instead of getting locked in internal discussions. We have to stay focused on the external environment, on the customer, and on the opportunities, and not complain.”